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What is Family Business?

Family businesses are the lifeline of any economy. It is estimated that globally family businesses contribute around 70%–90% of the global GDP. India is no exception. Family firms are an important part of Indian culture and businesses.

Much of the retail trade, the small-scale industry, and the service sector are run by family businesses. In India, family businesses play a key role in the growth and development of the country.

Indian Family businesses account for 90 percent of gross industry output, and 27 percent of overall employment is generated by family firms. Some of the Indian Family Business groups are Tatas, Birlas, Bajaj, Godrej, and TVS group.

There are various definitions of a family business. In fact, there are as many definitions as there are authors writing on family businesses. However, in general, a family-owned business is one:

1. In which two or more extended family members influence the business through the exercise of kinship ties, management roles, and ownership rights, and/or,
   
   
2. Which the owner intends to pass to a family heir.

Family business writers have contributed scores of definitions in the family business literature emphasizing different aspects of a family business, particularly the form and level of family involvement or ownership control, the anticipation or occurrence of an inter-generational transfer of ownership, or management control.

Definition of Family Business

There are various definitions of family-run business and these can be grouped into two:

Structural Definitions

These definitions focus on the firm’s ownership or management arrangements, e.g., 51 percent or more ownership by family members:

Majority ownership by a single family and direct involvement by at least two members in its operation.

Anderson and Johnson

Ownership and operation by members of one or two families.

Stern

Single family effectively controls firm through the ownership of greater than 50 per cent of the voting shares; a significant portion of the firm’s senior management is drawn from the same family.

Leach et al

Process Definitions

These definitions stress how the family is involved in the business its influence on company policy, its desire to perpetuate family control of the business, and so on:

Two or more family members influence the direction of the business through the exercise of management roles, kinship ties or ownership rights.

Tagiuri and Davis

Transfer of ownership across at least two generations.

Ward

Family influence over business decisions.

Dyer

Types of Family Business

These are the types of family business:

1. Family–Owned Business
2. Family-Owned and Managed Business
3. Family-Owned and Led Company

Family–Owned Business

A family–owned business is a for-profit enterprise in which a controlling number of voting shares (or another form of ownership), typically but not necessarily, a majority of the shares are owned by members of a single extended family, or are owned by one family member but significantly influenced by other members of the family.

Family-Owned and Managed Business

A family-owned and managed business is a for-profit enterprise in which a controlling number of voting shares (or other form of ownership), typically but not necessarily a majority of the shares, are owned by members of a single extended family, or are owned by one family member but significantly influenced by other members of the family.

The business has the active participation of at least one family member in the top management of the company so that one or more family members have ultimate management control.

Family-Owned and Led Company

A family-owned and led company is a for-profit enterprise in which a controlling number of voting shares (or other form of ownership), typically but not necessarily a majority of the shares are owned by members of a single extended family, or are owned by one family member but significantly influenced by other members of the family.

The business has the active participation of at least one family member on the Board of Directors of the company so that one or more family members have at least a high level of influence over the company’s direction, culture, and strategies.

Conflict Resolution in Family Firms

One of the goals of a business family is to learn how to manage conflict inside the family so that good family decisions surface, individuals and businesses grow in healthy ways, and achieve their potential. Some of the techniques to resolve conflicts are as follows:

1. Establish Family Rules
2. Decouple Family Issues from Business Issues
3. Establish a Family Forum (Family Council)
4. Transitioning Next Generation

Establish Family Rules

Through the family council, the family usually builds and agrees on a set of rules that address key ownership issues. These values are often referred to as family constitution. Successful family businesses have adopted these rules and understood the need to establish strong intragenerational business relationships.

Decouple Family Issues from Business Issues

Family businesses should have clear lines of separation between family and business activities. Families that decouple or separate ownership issues from management issues and keep a balance between their relationship as family members and their contractual relationship as business owners have a more viable family business.

Establish a Family Forum (Family Council)

Families create family councils for the family owners which is a separate forum from the board of directors and management of the company. The family council becomes a forum that allows family owners to be actively engaged in the debate surrounding ownership and family issues. In this way, the threat of family conflict is lessened.

Transitioning Next Generation

Aligning the vision of the senior generation and the next generation is crucial to the success of the transition of the next generation. It is important that the next generations are involved and encouraged to learn about the business in order to provide them with the necessary experience and to develop a sense of ownership and commitment to the family business.

Managing the expectations of the next generation clear communication and greater transparency are key ingredients to minimize any future conflicts.